How India Attracts Foreign Investors

Table of contents

1. List of Tables

2. List of Abbreviations

Section 1: India’s general Conditions for Foreign Investments
1.1 Indian History and its economic Reforms
1.2 India’s Economy
1.2.1 The economic Structure
1.2.2 The Impact of Foreign Investments
1.3 Political Economics - Challenges India is facing today
1.4 Social Conditions
1.4.1 Social Developments and Poverty
1.4.2 Emigration
1.4.3 Business Culture

Section 2: Foreign Investments
2.1 Possible Strategies for Investments in India
2.2 India’s Attractiveness
2.3 Foreign Companies in India
2.3.1 Foreign Investments
2.3.2 German Investments

Section 3: India’s special Structure
3.1 The physical Structure
3.2 The demographic Structure
3.3 Economic Areas in India
3.4.The Special Economic Zones

1. List of Tables

Figure 3.1, p. 4: “The Reengineering Structure”, B. R. Dey, Business Process Reengineering & Change Management, New Delhi, 2005, p. 114

Figure 4.1, p. 6: “Model of change process”, B.R. dey, Business Process Reengineering & Change Management, New Delhi, 2005, p. 151

Figure 5.1, p. 9: “Ideal Pattern of a Reengineered Process”, B.R. Dey, Business Process Reengineering & Change Management, New Delhi, 2005, p. 134

Figure 5.2, p. 9: “Actual Pattern of a Reengineered Process without Monitoring”, B.R. Dey, Business Process Reengineering & Change Management, New Delhi, 2005, p. 135

Figure 5.3, p. 9: “Actual Pattern of a Reengineered Process with Monitoring”, B.R. Dey, Business Process Reengineering & Change Management, New Delhi, 2005, p. 135

2. List of Abbreviations

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Section 1: India’s general Conditions for Foreign Investments

1.1 Indian History and its economic Reforms

The history of today’s Indian civilization goes back to at least 5,000 years. Until the British conquest in the 19th century, the Indian history was similar to the European. Indian colonial time started with the landing of the Portuguese seaman Vasco de Gama in 1498. In the following century more and more European countries entered into trade with the Asian subcontinent. Britain dominated the trades and gained full military and economic control by 1857, followed by the founding of the Indian Empire, ruled by Queen Victoria’s viceroy. Economical structures were formed to the purpose of Britain’s colonial interests but at the end of the century the awareness of Indian nationalism and culture rose. After World War One Indian strive for Independency was strengthened by two key figures: Mohandas Karamchad Gandhi (also known as Mahatma Gandhi) was not only able to mobilize the rural population, who had been ignorant, exploited and apathetic, but also to unite Hindus and Moslems in the fight against the cast system. With Jawaharlal Nehru as president of the Congress Party Great Britain granted parliamentary self-governance for the provinces in 1935 and allowed elections in 1937, followed by a total breach between Hindus and Moslems. By 1947 Gandhi’s principles of nonviolence, passive resistance and civil disobedience beard fruits: Great Britain left the Asian subcontinent. Still trying to unite Moslems and Hindus, Gandhi was murdered by a Hindu-extremist in 1948 followed by the empire’s divide into India and Pakistan. Another war in 1971 caused the separation of Bangladesh from Pakistan.¹

On January 26th 1950 the constitution of the “Sovereign Socialist Secular Democratic Republic of India“² became effective - its structures remain until today. India is the largest democracy in the world with a population of 1.1 billion inhabitants and an area of 3.3 million km², which survived crisis and remains stable despite of its enormous heterogeneity, an unrivaled cultural, social and economic variety. But still a free capitalist market was not able to prevail: Nehru favored a model of a centrally driven and planned economy to fulfill the vision of an “Independent India” - following the model of the former Soviet Union. The mixed economy should protect India from foreign investments and secure its independency and self-reliance. However it lead to India’s isolation from the world market. The lack of competition caused low quality and zero productivity, inefficiency and ineffectiveness of Indian companies: the annual economic growth of 3,6% between 1951 and 1981 was not enough to field the rapid growth of population. The new prime minister of 1984, Rajiv Gandhi, brought new ideas to the Indian economy: Knowing that an economy was generally more efficient when established on competition as well as seeing an autarchic economy as an utopia, he was the first politician to discern the vision of a renewed Indian economy with an open market. Still his reforms were not radical enough. Growing National Debt up to 8,5% of GDP, a trade deficit up to 6 billion US$ due to two oil crisis in 1973 and 1991, and increasing foreign monetary support followed. An inflation rate of 17% and a null growth by 1991 forced the new regime under Narasinha Rao to decide on a radical reform and transformation of the Indian economic system, which has not been concluded by today. Additional reasons were:¹

- Declining support from agencies:the International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB), - the end of the Soviet era forced India to integrate more in world economy
- China - always seen as an opponent, competitor as well as a threat since the border

wars in the 60’s - that had opened its market in 1978 and since then performed phenomenally, caused pressure to pursue a similar path with similar success The core issues of the economic reformation were the manufacturing industries, trade, foreign investments and technology, resulting in an open market with gradually withdrawal by the Indian government. The following are the most important changes that have been announced until today:²

- devaluation of the Indian Rupee: since February 1993 the government does not decide on the exchange rate anymore. Instead it is oriented on the market conditions.
- greater allowance of foreign interests and shares in joint ventures from 40% to 51% of the ownerships fractions by 1991. Today foreign investments are welcomed in almost every sector of the Indian market and 100% of foreign ownerships fractions (foreign subsidiaries) are possible
- easier procedures of approval for foreign investments: no approvals by the governments are necessary anymore, except for certain sectors on the government’s “black list”
- reduction of import restrictions: by today 95% of products are free of import restrictions
- reduction of import duties as well as tax rates: between 1990 and 2000 the average custom rates were lowered from 87% to 30% and the maximum rates from 35% to 39%
- privatization of public enterprises since the mid 90’s

These reform among others eventually resulted the highest level of the real gross domestic product (GDP) growth in 2003-2004 of 8,4%.¹ The GDP per capita despite of an increasing growth is still very low compared internationally. Economics forecast India’s growth as the fastest among all newly industrializing countries (NIC) with a potential rate of 7-8% p.a. for the next 10 to 15 years.² There are several evidence highlighting India’s capable improvements of the overall situation:

- the historic low level of inflation of a little more than 4% between 2001 and 2003
- the growing part of consuming inhabitants (pessimistically estimated about 120-150 Mio.) with a growing buying power of 13,4% p.a.
- the positive forecasts for an economic growth of 6,5 to 7,5% for 2005
- India has had the second largest export growth in whole Asia from 1999 to 2003
- the current government is willing to pursue with the economic reforms

Especially in the sector of Information- and Biotechnology (IT, Bio-IT) India has experienced a boom and is slowly becoming a leader in these industries. India already has a leading role as an Outsourcing Destination with 44% of the global market of IT- and Business Process Outsourcing (BPO): India’s volume of sales with software, IT-services, BPO and Hardware in 2004/05 was USD 28 billion, expectantly USD 56 billion by 2007.³ The American news magazine “Newsweek” counted India in its July 2004 issue as one of the ten countries with the most promising future and underlined India’s quality as a future location for foreign investors.

1.2 India’s Economy

1.2.1 The economic Structure

Looking at the structure of India’s political economics as well as their added value, agriculture still remains with an enormous importance, despite of declining constantly since the 1950’s (GDP share in 2002: 27,2%, added value 1990-1998: USD 92,8 billion). The service sector has grown as fast as the industry, which had never achieved a similar importance as agriculture (GDP share in 2002: 23,7%, added value 1990-1998: USD 82,7 billion). Since the 1990’s the disproportionate growth rates of the service sectors have excelled the industry’s (GDP share in 2002: 49,1%, added value 1990-1998: USD 137,9 billion), bearing the change of economic structures. Some economics even see the possibility of India “skipping the industrial revolution” and segueing right into the “service boom” to achieve greater growths. There are four main factors responsible for the fast growing service sector:¹

1) service exports do not rely on traditional infrastructure (roads, tracks, seaports and electricity) as much as the manufacturing industry, which struggles with the weak physical infrastructure.
2) “technological change has greatly reduced the potential of comparative advantage based on low wages. Rapidly increasing mechanization of production means that in most lines of production, the labor content has dropped to below 10 per cent” (Aiyar 1999:11f), while in service industries it is almost 100%. Also services have become tradable due to modern technologies and communication channels (email, internet, stable telephone lines), not only in national markets but also globally.
3) The knowledge of the English language enables millions of Indians to offer comprehensive service to international companies, e.g. the service of a call center.
4) To place a whole factory, equipment and assets into a country like India requires a huge amount of investments, only few investors can afford. Compared with this services can easily and cheap be placed into a different country, because all they need is an existing telephone line and internet access, which enables even very small companies to outsource service tasks to foreign countries

Despite this, other reasons are responsible, why the manufacturing industry has not gained from the economic reforms as much as the service sector: manufacturing industry was most bounded within the planned and controlled economy and therefore was built on inflexible structures, which could not be renewed in a short time period to adapt to modern requirements, while the service sector had relied on international competition from the very beginning, due to a humble national market.² The sector “trade, transport and communication”, in which also services like back offices and call centers are drawn to, has grown from 1995 to 2004 with an average of 87% - faster than any other sector.

1.2.2 The Impact of Foreign Investments

Growing activities of foreign investors do have great impact on India’s economic system: it has not only changed the sectors’ consistency but also created a growing qualified competition for Indian companies. This also changed the requirements they will have to adapt to, to gain competitiveness by raising productivity, efficiency and effectiveness. India has executed a study in 2004¹ to determine whether foreign investments have positive or negative effects on the national companies. They came to the conclusion of spillover effects: such companies in branches with a high participation of foreign investors or intensively cooperate with foreign companies, do have a better economical business performance and productivity compared to early years or to other companies in branches with less collaboration.

1.3 Political Economics - Challenges India is facing today

Despite of a lot of improvements following the economic reforms, there are still various problems left, which do not only hinder economic growth but also unsettle investors’ confidence. Most crucial are the following problems:²

1) the Indian market is still influenced by protectionism, taking actions to protect the national economy from foreign competition. India took rank 45 out of 49 countries in the Protectionism Index of 2002 - but still ahead of China, which ranked 49.³
2) India’s legal system is one of the slowest in the world: court procedures, which are taken up to the supreme court, can continue up to 25 years.
3) It is still difficult as well as cost intensive for companies to exit loss sustaining and unprofitable business and lay off employees due to a missing exit policy.
4) Indian companies are still afraid of foreign competitors, due to not feeling competitive to the high-grade imports with much better quality than national products. Therefore Indian politics show an ambivalent behavior: they solicit foreign investors but on the same hand prevent a lot of investors’ projects.
5) The privatizing goals were not reached: only 40% of the planned privatizations between 1991 and 2003 have been implemented, due to political unsteadiness and not enough private investors, willing to take over the government’s business units.⁴ There is also a huge resistance from trade unions: governmental business units employ more workers than necessary for efficient production, resulting in laying off millions of workers by privatizing.⁵
6) Corruption, patronage and nepotism are still to find in India’s policy and administration. India ranks 2nd on the scales of the most corrupt countries established by the “Transparency International” organization and the Institute of “Political & Economical Risk Consultancy”.

[...]

¹ Wamser, J: [Standort], pp.28-44

² Ministry of Information and Broadcasting, p. 25

¹ Wamser, J: [Standort], pp.28-44

² ibid.

¹ GOI: [Ownership], p.3

² Schaaf, J.: [Outsourcing], p. 3

³ Schaaf, J.: [Outsourcing], p. 1

¹ Wamser, J: [Standort], pp. 56-63

² Nagaraj, R.: [Industrial], pp. 3707 ff.

¹ Siddhartan, L.S. & Lal, K.: [Liberalisation]

² Wamser, J.: [Standort], pp. 63-79

³ IMD: [Competitiveness]

⁴ Baijal, p.: [Privatisation], p. 1595

⁵ Sinha, P.: [Trade], pp. 143ff.